Bitcoin, the shadowy digital currency, is described by its backers as “a consensus network that enables a new payment system and a completely digital money.” As self-professed “digital skeptic” David Golumbia explains below, though, Bitcoin is more accurately understood as an ideology than as “cash for the internet,” another conceptual shortcut offered by proponents. When the Bitcoin world was rocked this week by the collapse of the Mt. Gox exchange—which today filed for bankruptcy—we asked Golumbia to help us see the development in context. Golumbia, author of 2009’s The Cultural Logic of Computation, is at work on a book project he’s calling Cyberlibertarianism: The False Belief in Digital Liberation. As he details below, that liberation won’t be bought with Bitcoin.
Stories about Bitcoin (BTC) have become hard to avoid recently, especially in stories regarding the loss or theft of most of the holdings of the major Bitcoin exchange Mt. Gox, but the meaning of those stories is much harder to judge. While it is widely understood to be an alternative form of money, according to most formal definitions Bitcoin is currency rather than money, and at any rate may be better understood not as a financial instrument but as the realization in software of a politics, one based on outdated conspiracy theories, most of which emerge from the far Right. Shorn of those politics, Bitcoin or technologies like it may one day function as useful global payment systems, but these will be far less world-shaking than most of Bitcoin’s most fervent advocates insist.
Those advocates tell us to focus on the way that Bitcoin’s intricate and original technology promises to solve urgent political problems. But it is not Bitcoin’s technology that fails to live up to these promises. Rather, the flaws lie in the diagnosis itself. Like many of the most influential ideas associated with what I and other scholars have called cyberlibertarianism, enthusiasts demand we understand Bitcoin as a welcome political intervention, but when pressed for details about that political intervention, its advocates unfailingly turn back to technical and engineering matters. In Bitcoin’s case this is especially notable, because the financial matters Bitcoin is said to “fix” are complex, technical, and hard even for experts to understand; Bitcoin advocates routinely reject this complexity and argue that well-regarded economists do not know what they are talking about (read the comments to Paul Krugman’s “Bitcoin Is Evil” for examples).
Bitcoin is the most famous of so-called “cryptocurrencies,” called that because the software used to create them makes heavy use of cryptographic techniques. It was developed by a shadowy figure or group of figures who went by the name Satoshi Nakamoto, who has not been heard from since 2010; in part it delighted hackers because it gave them a means to donate to WikiLeaks when MasterCard and Visa prohibited such donations. Without getting into the weeds of its technology—again, I think too much attention is paid to this part of it and that this actually distracts from its political and financial functions—here is a short summary of how it works from a recent piece by Adam Rothstein (for a more complete technical discussion see this post by Michael Nielsen):
Basically, [Bitcoin] is a peer-to-peer database that lists a number of units of value, or coins, by unique addresses, and assigns them to personal owners by more unique addresses. The database makes sure that only the right coins are assigned to the right owners by keeping a single list of who owns what, called the blockchain. It also makes sure that the blockchain cannot be falsified, by placing the transactions between pieces of a complicated code, which are called the proof of work. Since every computer on the network is simultaneously generating the proof of work (and is rewarded for doing so by being given a fraction of new BTC according to the amount of work they are doing, in what is called mining), it would take a computer that is more powerful than all the others combined to mess up the record. So, through this peer-to-peer verification system, the record stays legit, without needing the need for a centralized bank to be in charge.
In brief, Bitcoin allows a distributed network of user machines to create virtual “coins” (really just bits of software), with some certainty provided via both cryptography and computing power that it is impossible or at least very difficult to counterfeit them.